Summary: With the Communiqué (Serial No: 18) on the Amendment of the Corporate Tax General Communiqué (Serial No: 1) published on the Official Gazette dated May 25, 2021; explanations have been made regarding the implementation of financial expense restriction rules.
Explanations: The Communiqué (Serial No: 18) on the Amendment of the Corporate Tax General Communiqué (Serial No: 1) was published on the Official Gazette dated May 25, 2021 and numbered 31491. The regulations included in the aforementioned communiqué are summarized below.
1. Legal background
A provision for financing expense restrictions had been added to Corporate Tax Code in 2013. In accordance with the aforementioned regulation, in the companies whose foreign liabilities exceed its equity; up to 10% of the interest, FX differences, commission and similar charges over the exceeding portion shall not be considered tax-deductible in corporate tax calculation, except for such financing expenses included in the cost of investment. The President was also authorized to determine the rate for financing expense restriction.
The President exercised this authority with the President's Decree No. 3490, published in the Official Gazette dated February 4, 2021. Through this decree, it has been regulated that 10% of the said expenses and cost elements will not be deductible in tax calculation in periods starting from January 1st 2021.
2. Taxpayers within the scope
Financing expense restriction will be applied to corporate taxpayers whose foreign sources (liabilities) exceed their equities. However, since the comparison of foreign resources and equity is required in the application of financial expense restriction, this regulation is valid for taxpayers subject to the balance-sheet principle.
The following taxpayers will not be subject to financial expense restrictions.
Pension companies operating under the Law No. 4632
Deposit banks, participation banks, development and
investment banks established in Turkey and operating under the Law No. 5411, as
well as Turkish branches of such organizations established abroad and financial
Insurance and reinsurance companies operating under
the Law No. 5684
Financial leasing, factoring, financing companies and
savings financing companies operating in accordance with the contracts included
in the relevant articles of the Law No.6361
· Institutions engaged in capital market activities within the scope of the Law No. 6362
3. Period to which the financial expense restriction will apply
Corporate taxpayers who are within the scope of the expense restriction and keep their books on the basis of the balance sheet will determine whether they will be subject to financial expense restriction by making a comparison of equity and foreign resources (liabilities) on the basis of the balance sheet they will prepare in accordance with the Tax Procedure Law as of the last day of each advance taxation period.
Financial expense limitation will be taken into account for the first time as of the first advance corporate tax period of 2021.
4. Status of financial expenses regarding borrowings made before January 1, 2013
The provision of the Corporate Tax Law regarding the financial expense restriction has entered into force as of January 1, 2013. Accordingly, the expense and cost elements accrued as of January 1, 2021 in terms of nature and amount over the liabilities obtained before January 1, 2013 will be subject to expense restrictions.
5. Expense and cost elements related to foreign resources covered by the expense restriction
Expense and cost elements added to the cost of the investment are out of the scope of the expense restriction. The financial expense and costs which were mandatorily or voluntarily included in the cost of the investment in accordance with Tax Procedural Law communiques shall not be subject to financial expense restrictions.
For an expense or cost item to be subject to expense-restriction, it should arise due to use of liabilities and depending on using period of the liabilities. Guarantee letter commissions, printing and similar expenses for issue of securities which do not arise due to obtaining any foreign resource (liability) shall not be subject to restriction. Similarly, discounts applied due to early payment shall not be subject to financial expense restriction, as such amounts result in decrease in financial expenses.
In case of on-credit purchase of goods or services, any FX expenses that arise due to valuation of the balances in foreign currencies in payable accounts in accordance with provisions of Tax Procedural Law shall be subject to financial expense restrictions.
Stamp taxes arising on loan agreements, as well as bank and insurance transaction tax arising over payment remittance fees shall not be subject to financial expense restriction. On the other hand, bank and insurance transaction tax arising over the interests of loans shall be subject to financial expense restrictions.
In case loans obtained from banks are transferred to other group entities, the financial expense restriction shall be applicable for the entity that took over and used the loan.
6. Financial expense restriction in advance taxation periods
As the financing expense restriction became effective starting from January 1, 2021, the rules will be applicable in first advance corporate tax period for the year 2021 for the taxpayers using calendar year as the accounting period. For companies subject to special accounting period, financial expense restrictions shall apply in the first advance tax period of the special accounting period starting in 2021.
Corporate taxpayers who use a special accounting period and keep their books on the basis of balance sheet will not be subject to financial expense restrictions during the special accounting periods that start in 2020 and end in 2021. The aforementioned taxpayers will start to apply financial expense restrictions in the special accounting periods that will start in 2021 and end in 2022, provided that conditions are met.
7. Case in which financing income arise in addition to financing expenses
Taxpayers, who have obtained financing income as well as financing expenses, are not able to net off their income and expenses by comparing them in the application of expense restriction, and only the total of financing expenses should be subject to expense restriction. Even if it is within the same period, it is not possible to net off FX losses and gains arising from different sources.
8. Status of financing expenses considered as non-tax-deductible expenses due to thin capital, disguised profit distribution through transfer pricing and expense restrictions in passenger cars
The financing expenses such as interest and FX losses that had already been considered as non deductible expense in calculation of corporate tax base due to thin capital, disguised profit distribution through transfer pricing or expense restrictions in passenger cars shall not be considered in the calculation of the amount subject to financial expense restriction.